A corporate deposit can offer you higher rate, but it’s illiquid with some risks

SHARE

ARTICLE

A corporate deposit (CD) is a deposit with a company other than a bank. With bank deposits always offering low interest rates, corporate deposits have been increasingly seen as an attractive alternative.

The State Bank of India offers 6.25% for a one year deposit and 6% for a three-year deposit. In contrast, the highest rated corporate deposits offer you interest rates which are 1-1.5% higher as the table below shows.

Corporate Deposit Rates

Company

Rating

1 year(%)

3 years(%)

Shriram Transport Finance

CRISIL : FAAA, ICRA : MAA

7.49

7.72

Dewan Housing Finance

CARE: AAA, Brickworks : FAAA

7.70

7.85

Bajaj Finance

CRISIL : FAAA, ICRA : MAAA

7.60

7.85

ICICI Home Finance

CARE : AAA, ICRA : MAAA

7.30

7.50

HDFC

CRISIL : FAAA, ICRA : MAAA

7.4 (15 months)

7.55 (44 months)

Corporate deposits can also offer higher interest rates for senior citizens. Also, you could opt for monthly, quarterly or half yearly interest payments so that you receive income from your deposits at regular intervals. However, the interest from corporate deposits is taxable. If it exceeds Rs 5,000 in a financial year, Tax at Source (TDS) will be deducted at 10%. You can, of course, submit Form 15G/H to avoid TDS.

Corporate deposits also involve higher risks.They are, by nature, unsecured (not secured against the assets of the company). There is also a higher risk of default for investors. So, before picking a corporate deposit, keep these points in mind:

Be aware of SEBI rules

Not all companies are authorized to offer deposits or rather accept deposits. The norms for accepting deposits are set by the Securities and Exchange Board of India (SEBI). According to SEBI, companies which accept corporate deposits should:

i) Have a net worth of over Rs 100 crore. This was just Rs 1 crore earlier.

ii) Have a turnover (sales value) of over Rs 500 crore.

iii) Obtain a credit rating. This has to be done every year with a recognised credit rating agency.

Another important point is that Section 73 of the Companies Act 2013, has been amended to include a rule that every company inviting deposits has to enter into a contract for providing deposit insurance. This has to be done at least 30 days before the company issues the circular or advertisement for the deposit.

However, since not many insurance firms are offering deposit insurance which the companies can buy, firms can accept deposits without deposit insurance till March 31, 2018. So, you can expect deposit guarantee for your corporate deposit soon.

Check the rating of the deposit

As mentioned above, corporate deposits must be rated by ratings agencies. Although ratings are not a conclusive guide to risk, they give you a good idea of how safe the deposit is.

Ratings agencies will also issue reports for their ratings. You can use these to evaluate a company’s financials such as its profitability, debt-to-equity ratio and liquidity.

Avoid excessively high interest rates

Although high rates increase your returns, excessively high rates can be an indicator of higher risk. Such companies also tend to give huge commissions to distributors to push their products. If your distributor or agent is pushing the product aggressively, ask him about the commission being offered.

Spread your money

Another way to lower risks is by not investing in a single company. Put your money in deposits from different firms. Choosing companies from the same sector also is not a great idea. If the industry itself doesn’t do well, then, the companies in that industry or sector tend to suffer.

Keep it short

Stick to deposits which have a term of three years or less. That way, you take on risks for a short period of time. This will also give you an opportunity to invest your money elsewhere if other options come up.

Be sure you won’t need the money early

You must understand that for corporate deposits, premature repayment is at the discretion of the company. It is not going to be easy to get back your money before maturity. There might be heavy penalties even if you do.